Delaware uncorporation jurisprudence takes a step back

Francis Pileggi has an interesting post on a books-and-records claim in connection with a limited partnership takeover. His thorough description of the case leaves little work for me in that regard, but I do want to make a few points about two interesting aspects of the case.

First, As Mr. Pileggi suggests, there is the fact that the Delaware court was willing to imply a proper purpose requirement into an agreement that plainly didn’t have one. Indeed, the court went out of its way to do so, since it had already determined with some basis that the agreement didn’t cover the request, and that there was no improper purpose problem with materials that would have been within the agreement.  The court expressed concern at several points in the long opinion that the plaintiff was interested in the books and records mainly as a potential bidder for control rather than an owner.

My article The Uncorporation and Corporate Indeterminacy discusses my hopes and concerns about whether courts would, as they should, apply contracts rather than general governance rules in uncorporation cases. An opinion last month by Chancellor Chandler gave me cause for hope. This case pushes me back slightly in the direction of concern.

Second, the case is interesting for the light it casts on takeovers in uncorporations. I’ve written in my Rise of the Uncorporation that even publicly held uncorporations are generally fairly takeover-proof because the owners often have minimal management rights, and the rights may not be tradable. I have reasoned that this doesn't leave the owners too vulnerable because the tradeoff is that they get some assurance of receiving a stream of cash flows.

But here we have a takeover.  Moreover, the court characterizes the plaintiff as specializing in tender offers for partnerships, a business that is given some legs by the deep discounts in the targets’ real estate investments. So the partnerships' governance structure does allow room for takeovers to come into play when the firm is facing particularly hard times.

Unless, that is (as in this case), the courts decide to add takeover protection that the firm’s agreement does not expressly provide.